Capital in the Twenty-First Century (54 page)

While awaiting the ideal society of the future, let us try to gain a better understanding
of wage inequality today. In this narrower context, the main problem with the theory
of marginal productivity is quite simply that it fails to explain the diversity of
the wage distributions we observe in different countries at different times. In order
to understand the dynamics of wage inequality, we must introduce other factors, such
as the institutions and rules that govern the operation of the labor market in each
society. To an even greater extent than other markets, the labor market is not a mathematical
abstraction whose workings are entirely determined by natural and immutable mechanisms
and implacable technological forces: it is a social construct based on specific rules
and compromises.

In the previous chapter I noted several important episodes of compression and expansion
of wage hierarchies that are very difficult to explain solely in terms of the supply
of and demand for various skills. For example, the compression of wage inequalities
that occurred in both France and the United States during World Wars I and II was
the result of negotiations over wage scales in both the public and private sectors,
in which specific institutions such as the National War Labor Board (created expressly
for the purpose) played a central role. I also called attention to the importance
of changes in the minimum wage for explaining the evolution of wage inequalities in
France since 1950, with three clearly identified subperiods: 1950–1968, during which
the minimum wage was rarely adjusted and the wage hierarchy expanded; 1968–1983, during
which the minimum wage rose very rapidly and wage inequalities decreased sharply;
and finally 1983–2012, during which the minimum wage increased relatively slowly and
the wage hierarchy tended to expand.
⁴
At the beginning of 2013, the minimum wage in France stood at 9.43 euros per hour.

FIGURE 9.1.
   Minimum wage in France and the United States, 1950–2013

Expressed in 2013 purchasing power, the hourly minimum wage rose from
$
3.80 to $7.30 between 1950 and 2013 in the United States, and from
€
2.10 to
€
9.40 in France.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In the United States, a federal minimum wage was introduced in 1933, nearly twenty
years earlier than in France.
⁵
As in France, changes in the minimum wage played an important role in the evolution
of wage inequalities in the United States. It is striking to learn that in terms of
purchasing power, the minimum wage reached its maximum level nearly half a century
ago, in 1969, at
$
1.60 an hour (or
$
10.10 in 2013 dollars, taking account of inflation between 1968 and 2013), at a time
when the unemployment rate was below 4 percent. From 1980 to 1990, under the presidents
Ronald Reagan and George H. W. Bush, the federal minimum wage remained stuck at
$
3.35, which led to a significant decrease in purchasing power when inflation is factored
in. It then rose to
$
5.25 under Bill Clinton in the 1990s and was frozen at that level under George W.
Bush before being increased several times by Barack Obama after 2008. At the beginning
of 2013 it stood at
$
7.25 an hour, or barely 6 euros, which is a third below the French minimum wage, the
opposite of the situation that obtained in the early 1980s (see
Figure 9.1
).
⁶
President Obama, in his State of the Union address in February 2013, announced his
intention to raise the minimum wage to about
$
9 an hour for the period 2013–2016.
⁷

Inequalities at the bottom of the US wage distribution have closely followed the evolution
of the minimum wage: the gap between the bottom 10 percent of the wage distribution
and the overall average wage widened significantly in the 1980s, then narrowed in
the 1990s, and finally increased again in the 2000s. Nevertheless, inequalities at
the top of the distribution—for example, the share of total wages going to the top
10 percent—increased steadily throughout this period. Clearly, the minimum wage has
an impact at the bottom of the distribution but much less influence at the top, where
other forces are at work.

There is no doubt that the minimum wage plays an essential role in the formation and
evolution of wage inequalities, as the French and US experiences show. Each country
has its own history in this regard and its own peculiar chronology. There is nothing
surprising about that: labor market regulations depend on each society’s perceptions
and norms of social justice and are intimately related to each country’s social, political,
and cultural history. The United States used the minimum wage to increase lower-end
wages in the 1950s and 1960s but abandoned this tool in the 1970s. In France, it was
exactly the opposite: the minimum wage was frozen in the 1950s and 1960s but was used
much more often in the 1970s.
Figure 9.1
illustrates this striking contrast.

It would be easy to multiply examples from other countries. Britain introduced a minimum
wage in 1999, at a level between the United States and France: in 2013 it was £6.19
(or about 8.05 euros).
⁸
Germany and Sweden have chosen to do without minimum wages at the national level,
leaving it to trade unions to negotiate not only minimums but also complete wage schedules
with employers in each branch of industry. In practice, the minimum wage in both countries
was about 10 euros an hour in 2013 in many branches (and therefore higher than in
countries with a national minimum wage). But minimum pay can be markedly lower in
sectors that are relatively unregulated or underunionized. In order to set a common
floor, Germany is contemplating the introduction of a minimum wage in 2013–2014. This
is not the place to write a detailed history of minimum wages and wage schedules around
the world or to discuss their impact on wage inequality. My goal here is more modest:
simply to indicate briefly what general principles can be used to analyze the institutions
that regulate wage setting everywhere.

What is in fact the justification for minimum wages and rigid wage schedules? First,
it is not always easy to measure the marginal productivity of a particular worker.
In the public sector, this is obvious, but it is also clear in the private sector:
in an organization employing dozens or even thousands of workers, it is no simple
task to judge each individual worker’s contribution to overall output. To be sure,
one can estimate marginal productivity, at least for jobs that can be replicated,
that is, performed in the same way by any number of employees. For an assembly-line
worker or McDonald’s server, management can calculate how much additional revenue
an additional worker or server would generate. Such an estimate would be approximate,
however, yielding a range of productivities rather than an absolute number. In view
of this uncertainty, how should the wage be set? There are many reasons to think that
granting management absolute power to set the wage of each employee on a monthly or
(why not?) daily basis would not only introduce an element of arbitrariness and injustice
but would also be inefficient for the firm.

In particular, it may be efficient for the firm to ensure that wages remain relatively
stable and do not vary constantly with fluctuations in sales. The owners and managers
of the firm usually earn much more and are significantly wealthier than their workers
and can therefore more easily absorb short-term shocks to their income. Under such
circumstances, it can be in everyone’s interest to provide a kind of “wage insurance”
as part of the employment contract, in the sense that the worker’s monthly wage is
guaranteed (which does not preclude the use of bonuses and other incentives). The
payment of a monthly rather than a daily wage was a revolutionary innovation that
gradually took hold in all the developed countries during the twentieth century. This
innovation was inscribed in law and became a feature of wage negotiations between
workers and employers. The daily wage, which had been the norm in the nineteenth century,
gradually disappeared. This was a crucial step in the constitution of the working
class: workers now enjoyed a legal status and received a stable, predictable remuneration
for their work. This clearly distinguished them from day laborers and piece workers—the
typical employees of the eighteenth and nineteenth centuries.
⁹

This justification of setting wages in advance obviously has its limits. The other
classic argument in favor of minimum wages and fixed wage schedules is the problem
of “specific investments.” Concretely, the particular functions and tasks that a firm
needs to be performed often require workers to make specific investments in the firm,
in the sense that these investments are of no (or limited) value to other firms: for
instance, workers might need to learn specific work methods, organizational methods,
or skills linked to the firm’s production process. If wages can be set unilaterally
and changed at any moment by the firm, so that workers do not know in advance how
much they will be paid, then it is highly likely that they will not invest as much
in the firm as they should. It may therefore be in everyone’s interest to set pay
scales in advance. The same “specific investments” argument can also apply to other
decisions by the firm, and it is the main reason for limiting the power of stockholders
(who are seen as having too short-term an outlook in some cases) in favor of a power-sharing
arrangement with a broader group of “stakeholders” (including the firm’s workers),
as in the “Rhenish model” of capitalism discussed earlier, in
Part Two
. This is probably the most important argument in favor of fixed wage scales.

More generally, insofar as employers have more bargaining power than workers and the
conditions of “pure and perfect” competition that one finds in the simplest economic
models fail to be satisfied, it may be reasonable to limit the power of employers
by imposing strict rules on wages. For example, if a small group of employers occupies
a monopsony position in a local labor market (meaning that they are virtually the
only source of employment, perhaps because of the limited mobility of the local labor
force), they will probably try to exploit their advantage by lowering wages as much
as possible, possibly even below the marginal productivity of the workers. Under such
conditions, imposing a minimum wage may be not only just but also efficient, in the
sense that the increase in wages may move the economy closer to the competitive equilibrium
and increase the level of employment. This theoretical model, based on imperfect competition,
is the clearest justification for the existence of a minimum wage: the goal is to
make sure that no employer can exploit his competitive advantage beyond a certain
limit.

Again, everything obviously depends on the level of the minimum wage. The limit cannot
be set in the abstract, independent of the country’s general skill level and average
productivity. Various studies carried out in the United States between 1980 and 2000,
most notably by the economists David Card and Alan Krueger, showed that the US minimum
wage had fallen to a level so low in that period that it could be raised without loss
of employment, indeed at times with an increase in employment, as in the monopsony
model.
¹⁰
On the basis of these studies, it seems likely that the increase in the minimum wage
of nearly 25 percent (from
$
7.25 to
$
9 an hour) currently envisaged by the Obama administration will have little or no
effect on the number of jobs. Obviously, raising the minimum wage cannot continue
indefinitely: as the minimum wage increases, the negative effects on the level of
employment eventually win out. If the minimum wage were doubled or tripled, it would
be surprising if the negative impact were not dominant. It is more difficult to justify
a significant increase in the minimum wage in a country like France, where it is relatively
high (compared with the average wage and marginal productivity), than in the United
States. To increase the purchasing power of low-paid workers in France, it is better
to use other tools, such as training to improve skills or tax reform (these two remedies
are complementary, moreover). Nevertheless, the minimum wage should not be frozen.
Wage increases cannot exceed productivity increases indefinitely, but it is just as
unhealthy to restrain (most) wage increases to below the rate of productivity increase.
Different labor market institutions and policies play different roles, and each must
be used in an appropriate manner.

To sum up: the best way to increase wages and reduce wage inequalities in the long
run is to invest in education and skills. Over the long run, minimum wages and wage
schedules cannot multiply wages by factors of five or ten: to achieve that level of
progress, education and technology are the decisive forces. Nevertheless, the rules
of the labor market play a crucial role in wage setting during periods of time determined
by the relative progress of education and technology. In practice, those periods can
be fairly long, in part because it is hard to gauge individual marginal productivities
with any certainty, and in part because of the problem of specific investments and
imperfect competition.